Thursday, August 6, 2009

Taxing the middle class after all – Aug. 6, 2009 column

By MARSHA MERCER

It’s hard to argue with raising other people’s taxes.

When President Barack Obama said the best way to pay for health-care reform may be for people like himself “who have been very lucky and are in the top – not just one percent but top half percent – of the income ladder to pay a little bit more,” many people thought he had an excellent idea.

The late Sen. Russell B. Long of Louisiana was onto something when he said raising taxes is a game of "don't tax you, don't tax me, tax that fellow behind the tree."

It’s pleasant to think that a lucky few can deliver health-care coverage with little pain to themselves or anyone else. So why stop there? Tax the rich to rein in the ballooning federal deficit and save Social Security and Medicare.

If only it were that easy.

It’s time to put aside the happy fiction that tapping the top 5 percent of tax filers can solve the nation’s financial troubles. It won’t happen.

Sad but true: The deep pockets aren’t deep enough. That’s not just a Republican line; liberal economists say taming the deficit beast will require help from the middle class too.

Candidate Obama promised everybody making less than $250,000 a year that they won’t pay a dime more in taxes. President Obama is sticking to that promise and is pledging to pay for health-care reform without adding a penny to the federal deficit.

Like every president, Obama also has taken aim at wasteful government spending, fraud and abuse, but those popular targets never yield much.

Something’s got to give.

Polls show most people favor paying for health reform through limiting tax deductions for high rollers and forcing smokers to pay more per pack.

Senate leaders have a list of revenue options. These include requiring well-off seniors to pay more for prescription drugs, taxing people who don’t buy health insurance and companies that provide especially generous insurance plans, new excise taxes and limits on health savings accounts. Meanwhile, committees are working to whittle down the price tag of a trillion dollars over 10 years.

Even if some form of paid-for reform becomes law, though, we’ll still face a stack of bills from the economic stimulus plan and other Obama spending projects. The conventional wisdom used to be that “deficits don’t count.” These days, people are worried about the country’s massive deficit.

Two of the president’s top economic advisers refused on Sunday talk shows to rule out raising taxes on the middle class. Nor are they saying yes to higher taxes just yet.

“It is never a good idea to absolutely rule things out no matter what,” Larry Summers, a former Treasury secretary, said on CBS’ “Face the Nation.” And Treasury Secretary Timothy Geithner said on ABC’s “This Week” that once the recovery is established,“We have to do what’s necessary” to bring down the deficit, and that will require “some very hard choices.”

White House press secretary Robert Gibbs said,“I don’t think any economist would believe that, in the environment that we’re in, that raising taxes on middle-class families would make any sense.”

Isabel V. Sawhill, an economist at the Brookings Institution who was on Clinton’s budget team, is among those saying higher taxes for the middle class are inevitable.

Sawhill told New York Times reporter Jackie Calmes, “There is no way we can pay for health care and the rest of the Obama agenda, plus get our long-term deficits under control, simply by raising taxes on the wealthy,” adding, “The middle class is going to have to contribute as well.”

All this explains why you’ll be hearing more about a value-added tax.

The VAT is a consumption tax used in scores of countries around the world. The tax on goods and services is assessed along the line, rather than at the end point of sale, like a sales tax. Since consumers don’t see it, the VAT is a way to raise taxes fairly painlessly.

Alan Greenspan, former chairman of the Federal Reserve, said Sunday that he thinks a VAT is likely – in time.

A growing group of academic and think-tank economists are pushing a VAT as part of an overhaul of the income tax code. Proponents say a VAT is fair because nobody can evade it, and tinkering can make it less regressive.

Still, the idea will take some getting used to.With a VAT, everybody is “that man behind the tree.”